Investor demand for real estate stays strong

Global investment volumes in the third quarter of 2017 were virtually identical to levels in Q3 2016, bringing volumes over the first nine months of the year 1% higher than last year. In a quarter where investors had to cope with geopolitical tensions, an ambiguous legislative agenda in the U.S. and the prospect of rising interest rates, global real estate investment has been resilient with third quarter levels still 23% higher than the long-run average.

U.S. market cools, while Europe and Asia Pacific see further gains

Investment activity in the Americas declined for the third successive quarter, with volumes over the first nine months of 2017 down 11% from last year. Much of this decrease came from the U.S. as the investment cycle matures and some investors become more selective. Elsewhere in the region Mexico also saw volumes decline by 11%, while both Brazil and Canada managed to better their performance from last year.

European capital markets remain active as investment volumes over the first nine months expanded by 14% compared with the same period a year ago. The German and Dutch markets have continued to perform strongly, with investment rising to cyclical highs. In the UK, volumes climbed 28% in a ‘bounceback’ from a year marred by Brexit uncertainty.

Continued demand for property in Asia Pacific saw third quarter transaction volumes edge up 5% compared to last year, bringing nine-month volumes 12% higher than 2016. Singapore, Hong Kong and China saw double-digit increases in investment over the first three quarters, while a mega-deal in India has brought investment to its highest level on record.

View

Recent investment transactions

2017 investment activity still on pace to match last year

The weight of capital seeking to access the sector is still significant and, despite being deep in the cycle, investors are actively looking for new ways to deploy funds. Global gateway markets remain liquid and occupier fundamentals are still supportive of investment activity. Given this, we expect 2017 transactional volumes to stay level with the US$650 billion we recorded last year.

Even with an expanding weight of money targeting real estate, the challenges of deploying capital in a market short of product, combined with greater investor discipline and late-cycle caution, are likely to constrain volume growth next year and we predict that volumes will soften by 5%-10% in 2018 to around US$600 billion.

Capital value growth rebounds

Capital value growth for prime assets across 26 major office markets has rebounded to 5.6% in the year to Q3 2017, the strongest growth in a year. Year-end capital value growth is expected to be maintained at the 6% level, exceeding our projections at the beginning of the year.

Several major office markets have recorded double-digit capital value growth over the past year, a result of steady income growth and further yield compression. Frankfurt, Hong Kong and Milan, where yields have compressed by 50 bps or more, are the top office market performers.